Over the past 40 years, the mathematical correlation between inflation and the U.S. Dollar is almost zero. But this is where mathematical economists screw up. Inflation only impacts the U.S. dollar when inflation is going up. Inflation doesn’t impact the U.S. dollar when inflation is flat or going down.
Historically, a rising year-over-year inflation rate has caused the U.S. Dollar Index to swing sideways or fall. At the very least, rising inflation is not bullish for the U.S. Dollar.
2009 – 2011
Inflation jumped in the initial stage of America’s economic recovery.
The U.S. Dollar swung sideways while inflation surged. Here’s the USD Index.
2002 – 2005 and 2007 – 2008
During both of these periods, inflation went up while the U.S. dollar tanked.
Inflation went up from 1987 to 1991. The U.S. dollar slowly grinded lower.
Late-1972 to the end of 1974. Late-1976 to early-1980
In both of these cases, inflation went up and the USD Index went down.
2 factors impact year-over-year headline inflation
- Year-over-year change in oil prices
Oil prices don’t impact headline inflation. The year-over-year change in oil impacts inflation. When the year-over-year change in oil goes up, the inflation rate goes up (accelerates). When the year-over-year change in oil goes down, the inflation rate does down.
Wage growth is the second factor that impacts inflation. When the labor market becomes sufficiently tight, wage inflation puts upwards pressure on headline inflation. The definition of “sufficiently tight” – NAIRU – changes over time and is debatable.
For example, the economy didn’t reach NAIRU until unemployment fell to 3.6% in 1966.